Saturday, September 12, 2009

Finance Chapter 18 - Long Term Financial Planning

Short term planning <12 months < long term plannning = typically 5 years "Planning Horizon" although some look out 10 yrs+.

Why build a financial plan? What do you get out of it?
- For contingency planning (aka scenario planning). a good financial plan should help you adapt as events unfold
- To Considering options.
- To force consistent

Financial Planning Models help planners explore the consequences of alternative strategies. Models range from sinple to ones that incorporate hundreds of equations. They support the planning process by making it eaier and cheaper to construct forecast financial statements.

Components of a FPM

Inputs - The inputs to the FP consist of the firms current financial statements and its forecasts about the future. The principal forecast is the likely growth in sales.

The planning Model - the model calculates implications of forecasts for profits, new investment and financing.

Outputs - the output consists of financial statements (income, balance sheets, cash flows). These are called pro formas. Can also be 'financial ratios'.

Def - percentage of sales models - Simple planning model in which sales forecasts are the driving variables and most other vars are proportional to sales.

NOTE: Financial models ensure consistency between growth assumptions (forecasts) and financing plans, but they do NOT identify the best financing plan

NOTE: Figure 18-2 has a great model spreadsheet

NOTE: Example 18.3 is a great exercise for excess capacity

While models help managers be consistent between their growth goals, investments and financing they can obscure the basic issues... Therefore it's good to have some 'rules of thumb'